Big rent hikes foreseen for downtown apartments

(Crain's) — Last year, apartment landlords worried that downtown Chicago would soon have too much rental housing. By next year, it may not have enough — much to landlords' delight.

After surviving a big development boom, downtown apartment owners will soon have the upper hand over tenants, allowing them to hike rents by as much as 8% to 10% in the second half of 2011, says Ron DeVries, vice-president at Appraisal Research Counselors, a Chicago-based research and consulting firm.

“I think we are poised for some rent spikes next year because demand is so high,” he says. “Everyone wants to rent.”

Demand for downtown apartments has outpaced supply, even as developers have built nearly 5,600 units over the past three years amid the worst economy since the Great Depression. That combination would normally make life miserable for landlords, but the depressed condominium market and shaky economy have saved them by encouraging more people to rent instead of buying.

“Renting just allows for flexibility in your life, and when people are uncertain, they want flexibility,” says David Lynd, president and chief operating officer of the Lynd Co., a San Antonio-based developer that recently completed EnV, a 249-unit apartment tower in River North.

The occupancy rate for Class A downtown apartments rose to 94.7% in the third quarter, up from 94.5% in the second quarter and 91.1% a year earlier, according to a recent report from Appraisal Research.

The average monthly net effective rent, which factors in concessions such as free rent, was $2.22 a square foot, unchanged from the second quarter but up 5.7% from third-quarter 2009.

But the most surprising indicator of demand is absorption, or the change in the number of occupied apartments. Downtown landlords have rented out an additional 2,076 units since the end of 2009, an 11.7% increase, according to Appraisal Research. At the current rate, 2010 will go down as the best year for absorption since at least 2001, the earliest year for which figures are available.

And that's despite a weak job market, usually the most important driver of demand for apartments. The Chicago area still had 69,300 fewer jobs in September compared with year earlier, but jobs are coming back, a good trend for landlords.

Developers have added 2,324 apartments to the downtown market in 2010, the most since at least 1999, the result of a construction boom that began before the financial crisis choked off development. With no new projects under way, it could be two years or more before apartment supply increases again, which could shift the market even more back in landlords' favor.

The weak condo market remains a competitive threat, as condo owners rent out their units. And two condo projects in the South Loop — the 333-unit Lexington Park and 248-unit Astoria Tower — could go rental, adding more supply in the coming months.

Given the strength of the market, developers are itching to build again, but securing construction financing remains a challenge. Appraisal Research predicts that plans for two or three downtown projects comprising 800 to 1,300 units will come to fruition over the next six to nine months.

Mr. Lynd says his firm is eyeing two downtown properties for future development. He likes Chicago because of its status as the capital of the Midwest, drawing young professionals from nearby states who want to work and live in a big world-class city.

“If you're in the Midwest and you're looking for opportunity, where are you going to go?” Mr. Lynd asks. “You're going to go to Chicago.”

Rents at EnV, Lynd's first Chicago project, are slightly higher than the company's initial projections, he says. The 29-story building at 161 W. Kinzie St., which opened in July, is about 40% occupied and is averaging about four to eight leases a week.